By Ray Birch
WASHINGTON—Claims that many financial providers will stop offering overdraft services if the CFPB’s proposed new rule is enacted are overblown and wrong, according to the Consumer Federation of America (CFA).
Some have suggested banks and credit unions would exit overdraft offerings and just decline transactions due to a lack of profitability from the price cap the Bureau is suggesting. Credit unions have been among those pushing back most strongly. But the CFA’s Adam Rust said the real issue is that too many financial institutions have become overly reliant on overdrafts as a revenue source.
Rust, CFA director of financial services, acknowledged to CUToday.info the CFPB’s new overdraft proposal has certainly raised a great deal of concern among credit unions and their trade group, America’s Credit Unions, which has called the CFPB proposal a “war on America’s families.”
When contacted by CUToday.info, America’s Credit Unions declined to comment on the what the Bureau is calling for.
Raising a Question
“There are all kinds of ways that a relationship can be profitable for an institution, and to say we have to make this margin on a product or we’ll shut it down raises the question of how much were they relying on overdraft income,” Rust said. “It’s clear to me that a lot of institutions are relying on overdraft revenue more than they ever intended. That's just my perspective.”
The CFPB rule is targeted at financial institutions above $10 billion in assets, which is the size of institutions the CFPB regulates. But analysts believe the effects will trickle down to FIs of all sizes due to competitive pressures. For instance, if a Chase bank just down the street from a $500-million CU is charging $5 per overdraft and the CU is charging $25, credit unions have argued members will vote with their feet.
‘CU Appeal Should be Greater Than a Fee’
“I really don’t understand that argument because those institutions will not be required to make that decision on pricing,” Rust said. “It seems to me they will not have any new regulatory pressure, and then it wouldn't have any bearing on how they choose to operate their businesses. Credit unions, to some extent, are insulated from competition through their field of membership privilege. Also, I would think that the benefits of working with a credit union would outweigh a slightly higher overdraft price, and that the higher OD charge would not be enough to convince members to leave the credit union.
“I think a credit union’s appeal to members is greater than just the fee associated with a single product. If an institution competes solely on price, they always face a threat from competition,” Rust added.
In previous CUToday.info reports, experts have contended many financial institutions will simply stop offering overdrafts if the CFPB regulates the service.
A ‘Curious Argument’
Adam Rust
“That's a curious argument, because the CFPB isn't requiring them to lose money on overdrafts,” Rust said. “So, (why would) any institution that would effectively stop offering something solely because it was no longer a high-margin, high-profit enterprise…when there are so many other ways to make money?”
In a previous CUToday.info report, Rust had stated, “For too long, financial institutions have profited from our financial insecurity, earning billions from high fees that bear little or no relationship to the actual cost of an overage. A bank charter is a privilege, not an excuse to rip people off. Banking is supposed to be about making loans, taking deposits, and facilitating payments, but at some point, some banks decided it was also about charging junk fees. The CFPB’S proposed rule restores balance in the relationship between consumers and their financial institutions.”
Rust told CUToday.info his remarks were really driven by looking at the “substance” of the CFPB rule and feeling it was something that would not pose a financial expense to depositories.
“…According to the proposal, if an institution chose to have a fee but charge a rate that was reasonable and proportional to their costs…that is allowed,” he explained. “The way (the rule) is structured it's not meant to be something that forces an institution to lose money. It just forces them to face the question of how they want to price their service.”
What’s Fair?
Is a price below $10 fair?
“I know these costs can vary by institution,” Rust said. “From the perspective of CFA, it’s not really my place to say this should be the price. But what I like about how the CFPB did it, it was similar to the way they constructed their credit card late fees exemption. I believe they looked at the mechanics of both the administrative costs associated with an overdraft and the cost of capital associated with just the liquidity requirements of that expense.
“I don't know what all the elements were… Furthermore, there are two ways that that that expense could be demonstrated,” continued Rust. “The CFPB rule does give institutions the right to say these are our real costs, and so we want to propose a fee based on these costs. If an institution can demonstrate that those are their expenses, and they're higher than what the CFPB is suggesting, they're permitted to do that.”
A Question for Every Institution
Rust reiterated the CFPB's rule does not eliminate the right for an institution to offer overdrafts.
“It just creates a tiered regulatory system both for the size of the institution and for choice of how the product is priced,” he said. “Any institution can continue to offer overdrafts, they just have to have it be subject to the disclosure rules and some of the other aspects of the rule. I think it becomes a question for an institution about how they want to respond. There's no reason that they can't continue to offer an overdraft product.”